Prosper didn't catch fraudster using its services, but CEO takes credit for conviction

Two years in a row, Prosper CEO Chris Larsen has used his keynote address at Prosper Days to announce progress in Prosper's fight against fraud.

In 2007, he announced the first arrest of a suspected fraudster, and, this year, the first conviction. According to the San Francisco Business Times,

Lenders attending Prosper Days made it clear that they're eager for the company to do more to crack down on fraud, even as Larsen touted Prosper's first conviction for someone committing fraud through Prosper.

Both of Larsen's speeches were referring to the same person, Jehoshua Sean Kilen, who, from November 2006 until January 2007, used Prosper to launder funds which he had stolen from accounts at Key Bank, his former employer. He pled guilty to one count of bank fraud in federal court (Case No. 07-5011M, Western Distrct of Washington), and was sentenced to 18 months in prison.

But what was Prosper's role in bringing Kilen to justice?

Based on the complaint filed in federal court, it looks like Prosper didn't have a clue that Kilen had used - and was still using - its services to facilitate the theft of approximately $120,000, until the federal investigator assigned to the case called Prosper.

According to the complaint, Key Bank started an internal investigation in November 2006, because of the size of the transfers from one of the looted accounts.

On January 19, 2007, once it determined that $96,000 had been stolen from an account belonging to a deceased individual, and that $80,000 of those funds had been transferred to Kilen's Prosper account, Key Bank contacted the feds. A federal investigator placed a call to Prosper's head of security on the same day.

It appears that, prior to that call, Propser was oblivious to the fact that Kilen was using its site to commit fraud. In fact, just one day before it got the call, Prosper was still allowing Kilen to slowly transfer the stolen money from Prosper to his own bank account.

(In fairness, it does appear that Prosper, once it was contacted by the feds, did significantly assist the investigation by identifying a second Key Bank account from which Kilen had transferred an additional $40,000. It also provided documentation showing that the funds Kilen withdrew from Prosper had ben deposited in Kilen's own bank accounts.)

Kilen, then living in the Tacoma, Washington, area, opened his Prosper account on November 2 or 3, 2006, and, during November and December, added four verified bank accounts. Two of these belonged to him; the other two were accounts which he had used his position as a relationship manager at Key Bank to compromise. He attempted to add a third Key Bank account, but it failed verification.

Kilen then transferred a total of approximately $120,000 from the two compromised Key Bank accounts into his Prosper account. He made various outbound transfers totalling $32,351.23 from Prosper to his own bank accounts, and invested $7858.61 in Prosper loans. (Since I can't find a lender who matches this exact amount, I suspect this was his loan balance as of January 19, not the amount he loaned out.) Prosper did block one $20,000 outbound transfer, because of its size, but allowed subsequent smaller transfers, the last one being $2,500 on January 18. This left Kilen with a cash balance at Prosper of approximately $80,000.

By January 23, 2007, Key Bank had reversed the unauthorized transfers to Kilen's Prosper account, leaving it with a negative balance of $40,000. Kilen then called Bryan Maas at Prosper to ask what happened to his funds. Maas got him to acknowledge that the Key Bank accounts did not belong to him, though Kilen claimed that he had been given permission to use them. Maas then referred Kilen to Prosper's head of security, who told him that the ACH transfers had been reversed, and advised him to contact Key Bank for an explanation.

Kilen was arrested on February 2, 2007, in California, two weeks before Prosper Days.

One fraud conviction after two years isn't much to brag about, given lenders' suspicion that fraud committed by borrowers frequently goes unnoticed and unpunished by Prosper. But when the record indicates that Prosper's internal security staff failed to notice the fraudulent activities until a federal investigator contacted them, Kilen's arrest and conviction is hardly a testament to Prosper's success - or even its commitment - with regard to stopping fraud on the site.

Larsen did say, according to reports from attendees, that thirteen other fraud cases are in the pipeline - three filed, ten in preparation. Perhaps those will reflect more favorably on Prosper's own anti-fraud efforts.